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Houston: The Banks Have A Huge Problem

April 15, 2020

Houston: The Banks Have A Huge Problem

For many years after the financial crisis, US commercial banks were mocked when instead of generating earnings the old-fashioned way, by collecting the interest arb on loans they had made, or even by frontrunning the Fed with their prop (and flow) trading desks, they would “earn” their way to just above consensus estimates by releasing some of their accumulated loan loss reserves, which thanks to creative accounting, would end up boosting the bottom line. The thinking here went that having suffered massive losses during the financial crisis “kitchen sink” when all banks suffered crushing losses to they would get bailed out, banks would then “recoup” billions in losses over time that would be run through the income statement as a reversal of accrued loss provisions.

Well, after the longest expansion in history, it’s time for this process to go into reverse, and instead of releasing loan loss reserves the banks are now starting to build them up again in preparation for a wave of consumer defaults due to the US economic shutdown.

As we reported earlier, this big story from earnings season so far – now that all major US money center banks have reported earnings – has been how much in loan loss provisions and reserves have the big US banks taken as precaution for the economic upheaval due to the coronacrisis. As shown below, on average most banks – this time including the hedge fund known as Goldman Sachs which has since pivoted to becoming a subprime lender to the masses with “Marcus” – saw their loan loss provisions surge by roughly 4x from year ago levels, with JPMorgan’s jumping the most, or just over 5x, hinting the other banks are likely undercapitalized for the storm that is coming.

…click on the above link to read the rest of the article…

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